What you need to know about ESG

The road to hell is paved with bad investments

A new approach to investing known as environmental, social and governance investing, or ESG, has been gaining ground. Financial services giant Vanguard is creating new ESG funds, and former Vice President Al Gore is advocating ESG as a way to halt carbon emissions. Florida Gov. Ron DeSantis, though, has blasted the move to ESG, saying it “threatens the vitality of the American economy and Americans’ economic freedom by targeting disfavored individuals and industries to advance a woke ideological agenda.”

So what is it?

ESG investing is a tool to reshape markets according to the vision laid out by Klaus Schwab, founder and CEO of the World Economic Forum and author of “Stakeholder Capitalism.”

Schwab argues that the future of business should be one in which “[t]he interests of all stakeholders in the economy and society are taken on board, companies optimize for more than just short-term profits, and governments are the guardians of equality of opportunity, a level playing field in competition, and a fair distribution of and distribution to all stakeholders with regards to the sustainability, and inclusivity of the system.”

Those seem like laudable goals.

But look deeper, though, some would urge. “ESG empowers an unelected cabal of bureaucrats, regulators, and activist investors to rate companies based on their adherence to left-wing values,” former Vice President Mike Pence wrote in an opinion piece for The Wall Street Journal. “A low ESG score can be devastating, making it virtually impossible for a company to raise capital – and that is exactly the point,” Pence wrote.

ESG “allows the left to accomplish what it could never hope to achieve at the ballot box or through competition in the free market,” Pence added.

The “e” in ESG represents “environment.” ESG promotes favored environmental causes, while attacking essential industries that produce carbon dioxide — and energy. This could have devastating long-term consequences.

Alex Epstein, author of the “Fossil Future,” offer a threefold critique of ESG’s view of energy, which he deems immoral: “1. The world needs much more energy. 2. Fossil fuels are the only way to provide most of that energy for the foreseeable future. 3. Any problems associated with CO2 pale in comparison to problems of energy deprivation.”

Recovering from a pandemic and dealing with the effects of an ongoing war in Europe threaten to make worldwide famine a reality, especially for three billion people around the world who each use less electricity each year than a typical American refrigerator.

It is in this world that ESG’s advocates call for decreasing fossil fuel production, seemingly without realizing how crucial fossil fuels are to the most basic of human needs.

Fertilizer production depends heavily on fossil fuels. The industrial fuels used both to power large-scale agricultural equipment and transport those crops through the global supply chain are dominated by fossil fuels.

The American Midwest, including Michigan, is in danger of grid blackouts. Europe suffers from severe energy insecurity. Both situations a result of switching from cheap, abundant fossil fuels and toward unreliable and impotent renewables. Yet Schwab and others stump for net-zero carbon emissions.

The “S” in ESG stands for “social,” reflecting the idea that corporations should support social causes and go beyond simply pursuing profits on behalf of their shareholders.

Vivek Ramaswamy, entrepreneur and author of “Woke Inc.,” takes a different view. Corporations should be prohibited from working in the social sphere, he says. “Society gave corporations superpowers. Foremost among them was the gift of limited liability,” he writes. “In return, society demanded that companies use that power for only a narrow set of activities – namely, to make products and services – to prevent them from wielding too much power in our politics and other noncommercial spheres of our lives.”

When the firms which score companies on ESG metrics define the correct stance on any of today’s contentious social issues, they undermine this country’s democratic principles. How can people of different ideas and beliefs organize in the public square if financial institutions will shut down their accounts for having the wrong beliefs?

G, or “governance,” refers to how a company is run. Some companies have started to use this component of ESG to advance its other two components, E and S. For example, bonuses Mastercard employees receive will now be tied to how the company performs in pursuing ESG goals. Do shareholders or society benefit when executives tie workers’ bonuses to fulfilling objectives that have little to do with their line of business? Especially if workers might disagree with those objectives?

Those who define ESG rules have the power to determine which companies receive investment and financial support — based not on their prospects but on their adherence to arbitrary ideals and dangerous environmental standards. This is a truly concerning wielding of power.

As such, ESG ought to be regarded as a threat to human liberty.

Joshua Antonini is an environmental policy intern with the Mackinac Center for Public Policy.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.